EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 1, Problem 16QTD
Summary Introduction
To discuss: The way in which statement of bankruptcy reconcile with a management promised to optimize the wealth of shareholders.
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In 2001, Polaroid Company declared bankruptcy. How can you reconcile a bankruptcy declaration with a management pledged to maximize shareholder wealth?
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EBK CONTEMPORARY FINANCIAL MANAGEMENT
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- Matmart Corporation is contemplating seeking a voluntary liquidation of the Bankruptcy Reform Act. There are a large number of partially secured creditors who are opposed to the possibility of a liquidation and favor a restructuring of their debt, which will allow the corporation to return to profitability and positive operating cash flows. Values relevant to a possible liquidation are as follows: BookValue EstimatedNet RealizableValue Free assets consisting of cash, receivables, and securities. Inventory Equipment (net) Land. Buildings (net) Goodwill Total assets Accounts payable Note payable Accrued interest on mortgage payable Mortgage payable Unsecured creditors with priority. Total liabilities $ 125,000 420,000 180,000 300,000 1,200,000 300,000 $2,525,000 $ 340,000 600,000 24,000 1,000,000 70,000 $2,034,000 $ 85,000 330,000 120,000 350,000 1,000,000 $1,885,000 Of the net realizable value of inventory, $200,000 is pledged against $250,000 of accounts…arrow_forwardAtaway Company has severe financial difficulties and is considering filing a bankruptcy petition. At this time, it has the following assets and liabilities. The assets are stated at net realizable value. In a liquidation, how much money would be paid on the partially secured debt?arrow_forwardWhat are some situations other than immediate financial distressthat lead firms to file for bankruptcy?arrow_forward
- Management, the board of directors and creditors are working to avoid a bankruptcy situation for a firm. If they believe the firm's problems are temporary, which of the following should they consider before entering into any short-term restructuring arrangement? Whether existing management or a special trustee should be in charge during the restructuring Whether the value to shareholders could be increased by selling the firm in pieces Whether the long-term value of the firm will be impacted Whether a formal or informal filing will be requiredarrow_forwardWhich of the following statements is false? A) In bankruptcy, management is given the opportunity to reorganize the firm and renegotiate with debt holders. B) Because a corporation is a separate legal entity, when it fails to repay its debts, the people who lent to the firm, the debt holders are entitled to seize the assets of the corporation in compensation for the default. C) As long as the corporation can satisfy the claims of the debt holders, ownership remains in the hands of the equity holders. D) If the corporation fails to satisfy debt holders' claims, debt holders may lose control of the firm.arrow_forwardJust prior to filing for bankruptcy protection in 2009,General Motors asked its bondholders to exchangetheir investment in GM’s bonds for GM stock. Thebondholders rejected this proposal. Why might GM haveproposed this exchange? Why might the bondholdershave rejected it?arrow_forward
- Explain how a firm that never files for bankruptcy can still suffer from indirect bankruptcy costs.arrow_forwardWhich of the following statements regarding bankruptcy is not true? A. Companies can be forced into involuntary bankruptcy by the creditors. B. Companies cannot be forced into involuntary bankruptcy by the creditors. C. Bankruptcy can result in a company liquidating its assets with the distribution of those proceeds to creditors. D. Bankruptcy can result in financial reorganization and continued existence.arrow_forwardWhich one of the following unsecured liabilities has the highest priority when an insolvent company is about to be liquidated? Select one: a.Federal income taxes payable b.Loans made to the company by its stockholders c.Employees' claims for salaries d.Claims for expenses of administering the bankruptcy e.Bank loansarrow_forward
- Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.arrow_forwardAssume that the president of Freeman Industries Inc. made the following statement in the Annual Report to Shareholders: “The founding family and majority shareholders of the company do not believe in using debt to finance future growth. The founding family learned from hard experience during Prohibition and the Great Depression that debt can cause loss of flexibility and eventual loss of corporate control. The company will not place itself at such risk. As such, all future growth will be financed either by stock sales to the public or by internally generated resources.” As a public shareholder of this company, how would you respond to this policy?arrow_forwardA stockholder dissatisfied with the management of the corporation done by the Board of Directors surrenders his certificate of stocks and demands the return of the subscription price paid by him. Can he rightfully do this? Explain.arrow_forward
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How Bankruptcy Works; Author: Two Cents;https://www.youtube.com/watch?v=tpI0XWjIsqI;License: Standard Youtube License